Barclays 2005 Annual Report Download - page 220

Barclays PLC
Annual Report 2005
218
54 Financial risk management (continued)
Credit Risk Mitigation
Barclays actively manages its credit exposures. When weaknesses in exposures are detected – either in individual exposures or in groups of
exposures – action is taken to mitigate the risks. These include steps to reduce the amounts outstanding (in discussion with the customers, if
appropriate), the use of credit derivatives and, on occasion, the sale of the loan assets.
Barclays employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced
which is common practice.
Barclays manages the diversification of its portfolio to avoid unwanted credit risk concentrations. For example:
•maximum exposure guidelines are in place relating to the exposures to any individual counterparty;
•country risk policy specifies risk appetite by country and avoids excessive concentrations of credit in individual countries; and
•policies are in place that limit lending to certain industries, for example commercial real estate.
Credit derivatives are traded for profit and used for managing non-trading credit exposures.
Liquidity Risk Management
Liquidity risk is the risk that the Group is unable to meet its payment obligations when they fall due and to replace funds when they are withdrawn,
the consequence of which may be the failure to meet obligations to repay depositors and fulfil commitments to lend.
Liquidity management within the Group has several strands. The first is day-to-day funding, managed by monitoring future cash flows to ensure
that requirements can be met. This includes replenishment of funds as they mature or are borrowed by customers. The Group maintains an active
presence in global money markets to enable that to happen. The second is maintaining a portfolio of highly marketable assets that can easily be
liquidated as protection against any unforeseen interruption to cash flow. Finally, the ability to monitor, manage and control intraday liquidity in
real time is recognised by the Group as a mission critical process: any failure to meet specific intraday commitments would be a public event and
may have an immediate impact on the Group’s reputation.
Securitisation remains a proportion of the Group’s current funding profile, providing additional flexibility, and is an important tool in the
management of the Group’s capital and funding. During 2005 the Group has continued to securitise elements of the balance sheet, such as credit
cards, and has selectively securitised other parts, such as UK mortgages and commercial loans.
The ability to raise funds is in part dependent on maintaining the bank’s credit rating. The funding impact of a credit downgrade is regularly
estimated. Whilst the impact of a single downgrade may affect the price at which funding is available, the effect on liquidity is not considered
material in Group terms.
Absa monitor their cash flow against limits expressed as a percentage of their total deposits and current accounts rather than against absolute
mismatch limits. Absa also continues to assess the ongoing Rand money markets’ appetite for the Absa name and to improve their stress testing.
The difference in approach is not a major risk, and the integration project is working to more closely align Absa’s policies and practices with the
Barclays liquidity control requirements.
Liquidity Risk Measurement
Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and month as these are key periods for
liquidity management. This is based on principles agreed by the UK Financial Services Authority.
In addition to cash flow management, Treasury also monitors unmatched medium-term assets and the level and type of undrawn lending
commitments, the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of credit and guarantees.
Treasury develops and implements the process for submitting the Group’s projected cash flows to stress scenarios. The output of stress testing
informs the Group’s contingency funding plan. This is maintained by Barclays Treasury and is aligned with the Group and country business
resumption plans to encompass decision-making authorities, internal and external communication and, in the event of a systems failure, the
restoration of liquidity management and payment systems.
Sources of liquidity are regularly reviewed to maintain a wide diversification by currency, geography, provider, product and term. Whilst 2005 saw
relatively stable markets, with no significant consequences for the Group’s liquidity, significant market events over recent years including corporate
scandals contributed to a short-term flight to quality in financial markets from which Barclays benefited.
An important source of structural liquidity is provided by our core retail deposits in the UK, Europe and Africa, mainly current accounts and savings
accounts. Although current accounts are repayable on demand and savings accounts at short notice, the Group’s broad base of customers –
numerically and by depositor type – helps to protect against unexpected fluctuations. Such accounts form a stable funding base for the Group’s
operations and liquidity needs.
To avoid reliance on a particular group of customers or market sectors, the distribution of sources and the maturity profile of deposits are also
carefully managed. Important factors in assuring liquidity are competitive rates and the maintenance of depositors’ confidence. Such confidence is
based on a number of factors including the Group’s reputation, the strength of earnings and the Group’s financial position.
Notes to the accounts
For the year ended 31st December 2005